Three rules:
1. Give first, and you can take later.
2. Take first, and you must give later.
3. To get started, someone must take first. (There's nothing bad in taking first.)

Monday, November 21, 2016

A New Monetary System From Scratch, Part 3: Give and Take

In my previous post I concluded:

Our new monetary system is about keeping records of gifts given and gifts received
by each person. Betty gives a gift and this (transaction) is recorded
by making a credit/positive entry – the nominal value of which reflects
the value of the gift expressed in terms of the abstract unit-of-account
– on her account. Andy receives a gift and this (transaction) is
recorded by making a debit/negative entry on his account. Nothing moves
from Andy's account to Betty's account, or vice versa. There's only a
real-world 'banana flow' from Betty to Andy.

One assumption I left unspoken here is that the banana gift doesn't establish an on-going relationship between Andy and Betty. Andy is not expected to give a counter-gift to Betty. The system I have in mind was made explicit in the quotes from Ostroy & Starr (1990) and Kocherlakota (1996) in the previous post. Kocherlakota talks about an "interlocking network of gifts", which could perhaps be called a "multilateral gift economy". A very, very simplified version of this could look like this:

Six friends each agree to buy an item worth $20 (~market price/nominal value; going forward, when the word 'worth' is followed by a sum, it will always carry this meaning), to be given to someone else as a Christmas present. Later they put all six gift-wrapped items in a pot and each person, taking turns, draws randomly one item from the pot. The drawer has to keep the item she drew, unless it's the item she had bought, in which case she must put it back into the pot and draw a new one.

I'm not implying that trade in our economy is based on the box-of-chocolates idea emanated by Forrest Gump's mother. The principles I wanted to highlight with this example are:

The gift Eric bought can go to Wendy, while the gift Wendy bought can go to Stan (bilateral balance not required)

These are clearly impure gifts, because all participants know that they will receive a gift of more or less the same nominal value as the gift they give. What they do not know is from whom they will receive this gift. Take Betty in our original example. She gave bananas worth SK100 (skilos) to Andy. Next, she might bump into Carol and get carrots worth SK100 from her, without giving anything in return. The trade will be recorded in the record-keeper's central ledger by crediting Carol's account and debiting Betty's account, both with SK100. At this point, we consider Betty's account settled – her account balance in the central ledger has returned to zero. She received, in form of carrots from Carol, a counter-gift to her earlier banana gift to Andy.

In a gift economy, the recipient of the gift doesn't usually have a passive role. More likely, in a gift economy without explicit record-keeping, Andy might have met Betty with a cart full of bananas and told her that he was actually looking for bananas, to which Betty might have replied: "I have plenty of bananas, please take some! How many were you looking for?". Andy, knowing that Betty trusts he will return the gift, if not to her then to someone else – if he hadn't already done so – would accept Betty's gift of bananas without hesitation.

This kind of setup relies, of course, on multilateral trust. Full (utopistic) multilateral trust would mean that there would be no talk about previous gifts given or taken; instead, everyone could trust that everyone else balances his or her budget over time. More likely, there would be some kind of "budget balance enforcement" system at least partly based on rumors. "Free riders" would risk being exposed.

But our economy is a gift economy with explicit record-keeping. There, budget balance enforcement doesn't need to rely on rumors and the risk of reputation loss (leading to diminished trading opportunities, perhaps even to autarky, on the part of the individual).

In his paper "Informational Efficiency of Monetary Exchange" from 1973 – a paper which Kocherlakota builds on in his afore-mentioned paper – Joseph Ostroy writes (p. 607-608; italics in original):

As
a monetary version of the model of a trading economy, introduce a
central receiving station called a monetary authority. Its function is
to collect and collate the bits of information individuals have about
each others' trading histories. Each will require his trading partner to
write a signed statement, a check, indicating the amount by which the
partner's purchases exceed his sales. This record is forwarded to the
monetary authority who revises individual accounts on the basis of this
new information. Sellers, by requiring payment in money, are
guaranteeing a steady flow of information such that the monetary
authority, and it alone, is able to monitor trading behavior. Of course,
there is every incentive to require and deposit this information with
the monetary authority; otherwise, one would not receive credit for
sales and so have to cut back on purchases.

[...]

If the monetary authority is to be able to
make trades between different individuals
commensurable... we require a common
unit of account. While this convention is
essential to the operation of the recordkeeping
system, it is not identical to it.
Money is not simply a unit of account.

As I mentioned earlier, I'm not going to use terminology like "payments in money"; I don't even use the word 'money'. The word 'payment' implies a quid pro quo: the seller received something in return for her goods (this, in turn, sounds much like bilateral balance). Using the word 'payment', in Ostroy's sense, in the economy under study would lead to a paradox:

Betty received a payment (for her bananas) in the form of a record which states that she has given bananas worth SK100 without receiving anything in return.

The record tells us that there was noquid pro quo. Remember that Betty hasn't even heard about money. Her vocabulary most likely includes the word 'payment', but only in the sense "payment in kind" (that is, in the form of goods).

If we overlook what Ostroy says about payments and money, he could as well be describing our economy and its new monetary system. Ostroy's 'monetary authority' is our record-keeper, who we could call the central bank (like Nick does; it's so far the only bank in the economy). Andy and Betty inform the central bank about their trade where Andy's gifts received (SK100) exceeded his gifts given[1] (none) by SK100, and vice versa for Betty. The central bank, like Ostroy's monetary authority, revises individual accounts on the basis of this information. Had Betty not required that the central bank be informed about the trade, she would not have received credit for her banana gift to Andy and would have to cut back on receiving gifts from others (assuming an overall budget balance).

The decisive thing when it comes to the completion of a transaction is the credit entry on the giver's (seller's) account. The giver doesn't know the account balance of the taker (buyer[2]), neither does she care about it. Of course, the taker has to make sure that his account (or at least some account) can be debited, regardless of its balance, because credits must equal debits. But to suggest that the buyer transfers something to the seller would make no sense[3]. In our minds we can build an impenetrable wall between the two accounts. The central bank accountant follows two simple rules which he applies on a person-by-person basis: (1) if a person sells something, then credit her account, and (2) if a person buys something, then debit her account.

What is being recorded is how much each person has given or taken, without paying attention to who happened to be the counterparty in any particular trade. We know that Andy has taken goods worth SK100; from whom, it doesn't matter. We also know that Betty has given goods worth SK100; to whom, it doesn't matter. If we could trust that all transactions are legitimate, we could severe the link between a particular credit (entry) and a particular debit (entry), as long as the total credits equaled total debits on a given day (assuming records were updated only once, in the end of the day).

I hope that in this post I have managed to shed some further light on our new monetary system. (I have certainly managed to create some confusion as well. I believe it is unavoidable, although I could always do better in minimizing the amount of confusion.) In my next post I'm going to look into the central bank ledger and present you some T-accounts and the balance sheet. That's what you have been eagerly waiting for, right?

[1] We could simplify our terminology by substituting 'purchases' for 'gifts received' and 'sales' for 'gifts given', as long as we manage to keep in mind that there is no money involved. Thus, Andy bought and Betty sold bananas. The seller never gets anything in return (and this fact is recorded), unless she is at the same time a buyer (as is the case in a basic barter transaction).

[3] The reason why it seems to make sense to us – it used to make sense to me as well – is probably because we have learned, starting when we were very young, to think primarily in terms of transactions involving currency (to us, money often is currency, a thing). This means that we mentally project an image of a currency transfer "onto the ledger page". We fail to notice that currency is only a physical "counter", and when we use a ledger we do not need "counters". To me, accounting is primary and currency is secondary; currency can be interpreted in terms of accounting, but not vice versa – although Nick tries hard to achieve the impossible by introducing "red money". For a more detailed argument about "counters", see this and this comment of mine on Nick's blog.

31 comments:

1. Our new monetary system has a sophisticated value scale, understood by all participants. Using this value scale, bananas can be located in relative position against all other gifts.

2. After locating a relative value on the value scale, all gifts are recorded by assigned value. The nature of the gift is not recorded, only the value.

3. Every gift is recorded in two places: the account of the giver and the account of the receiver. The giver is assigned a positive value; the receiver, a negative value.

4. The recorder (as a knowledgeable being) keeps a continuous record of gifts and gift-receivers. Individual gift givers and receivers do not know the account record of other individual gift givers and receivers. (Could the recorder be an exception if he/she is observed as making or receiving gifts?)

5. There may be an enforcement mechanism (not yet fully described) if gifting vs receiving becomes seriously out of balance.

Conclusion: Hopefully, this new monetary system will bring order to an otherwise chaotic economic landscape.

I am looking forward to the page describing the central bank ledger for this new monetary system.

The word 'payment' implies a quid pro quo: the seller received something in return for her goods (this, in turn, sounds much like bilateral balance).

The word payment implies that all obligational ties between the giver and receiver of the good are void / paid for. The seller has no claim against anything the buyer owns. He 'settles' for the money instead. No bilateral quid pro quo in terms of goods reqired.

A payment is the transfer of an item of value from one party (such as a person or company) to another in exchange for the provision of goods, services or both, or to fulfill a legal obligation. In law, the payer is the party making a payment while the payee is the party receiving the payment. In trade, payments are frequently preceded by an invoice or bill.

Payment can take a variety of forms. Barter, the exchange of one good or service for another, is a form of payment. The most common means of payment involve use of money, check, or debit, credit or bank transfers. Payments may also take complicated forms, such as stock issues or the transfer of anything of value or benefit to the parties.

(...)The acceptance of a payment by the payee extinguishes a debt or other obligation. A creditor cannot unreasonably refuse to accept a payment, but payment can be refused in some circumstances, for example, on a Sunday or outside banking hours. A payee is usually obligated to acknowledge payment by producing a receipt to the payer. A receipt may be an endorsement on an account as "paid in full". The giving of a guarantee or other security for a debt does not constitute a payment.emphasis mine

I know your emphasis is on goods and services which, in a monetary economy, are not reciprocally traded (bartered) by definition. And I also agree that money, or whatever you wish to call it, is not a good. It is merely a counter of goods received or not yet produced.

Nevertheless, I find the terms payment, settlement etc. are quite well defined and do not contradict the fact that it takes human endeavour and production to earn the means of payment by which to finally close the circuit. Just because I no longer owe you anything personally (since I have paid you), doesn't mean I don't owe anybody anything. Goods are economically speaking non-existant without a counter thereof (which doesn' mean they're of no personal value). Equally, counters are worthless without actual goods and services to refer to. They're mirror images of one another. And the mirror image wants to feel valued, too. Just like René Magritte's pipe.

Roger: A very good recap! Partly to my surprise, I've managed to make myself understood (at least on those points which seem to cover well the basic principles) :-)

Regarding point 4, yes, the recorder has an overview of all entries made on all accounts, and thus all account balances (which together you seem to call 'accounting records'.) Balances are nothing more or less than the arithmetic result of cumulative entries made on an account.

You do see that so far the accounting itself is identical with Nick's world? Only our interpretations of it differ.

Oliver: I'm impressed. When you're patient, your arguments seem to gain (even more) weight and clarity. You concluding comparison with Magritte's pipe made me smile approvingly -- and not in a patronizing way! (I'm less well-read than some people are after they finish high school -- or J.S. Mill was when he was 8.) (You should read J. Bronowski's little book, "Science and Human Values", if you haven't already. He says that discovering a likeness between two different things is in the heart of both art and science. His BBC documentary "The Ascent of Man" had an enormous influence on me when I first saw it 4-5 years ago.)

Definition of 'payment' is a subject which has bothered me for about two years. I've discussed it a lot (also with myself), and I'm familiar with the definition you offer. It has its merits, and it's shared by more or less everyone -- except for me. Why did I end up rejecting it?

I've read the Wikipedia article perhaps six times. In that I pay attention to words 'an item' and 'transfer'. Was an item of value transferred to Betty in our example? Not really. Of course, the entry made on her account has value to her, as it means that she can take goods from others without giving anything in return, and still call herself even, or "quits", with the community. It could be understood to constitute 'an item'. But there's no transfer.

But this is still mostly semantics. The more fundamental reason for rejecting your definition has to do with forming a coherent macroeconomic theory. If I accepted your definition, then I would need -- always depending on the context -- to talk about "final payments" and "real payments", to distinguish them from a 'payment' as you define it. You hear this kind of language used by even economists, as in "You really pay for your house by working/labor." and "final payment is made in fiat money", or similar.

You said: "The word payment implies that all obligational ties between the giver and receiver of the good are void / paid for."

But this would be true if the seller accepted, say, any IOU offered by the buyer (without his endorsement) other than the buyer's own IOU? Would that constitute a 'payment' in your eyes?

Another problem I've found with 'payment' is that it isn't always clear

a) if it is something the buyer performs ("I paid you") and the seller receives ("You paid me") -- not wholly unlike a haircut --, or

b) something the seller receives for the goods he sold ("I got paid for the car I sold"), and the buyer performs in relation to the goods he bought ("I paid the car I bought").

How do you see this?

As you might see, I've given this a thought or two. I don't need you to confess that your definition doesn't work -- it clearly works for you; or should I say: it fits in the implicit model of the economy you use.

What is important to me is that you understand why I've made the choice not to share the conventional definition of 'payment'. As I hinted, my choice has a lot to do with the "big picture" where Betty doesn't get paid (for her bananas) by Andy or anyone when the credit entry is made on her account.

Oliver: I think Charles Goodhart (at one point; don't know how he thinks today) placed himself somewhere between our positions. This is from Meir Kohn's article I referred to in a footnote to Part 2:

"Goodhart (1975) makes the useful distinction here between media of exchange – “those assets, or claims, whose transfer to the seller will commonly allow a sale to proceed” – and means of payment – for which, following the exchange, the seller considers that final payment has been made for the sale items (a quid pro quo has actually been received)."

Well, he seems to be closer to me, but I'm sure that he considers, unlike me, "fiat currency" to be 'a means of payment'.

1. Once the gift-certificate is accepted by the laborer, "payment" has been made by the store. The laborer has no further claim under the original employment contract.

2. Acceptance-of-the-gift-certificate begins a new contract period. The length of the period runs until the gift-certificate is returned to the store for claim-of-performance.

3. If the gift-certificate was lost, the worker would have no further claim. The store owner could refuse to replace the lost property, explaining that the gift-certificate could have been traded (contrary to the workers claim) and therefore the store still has an unfulfilled claim outstanding.

You can see that I define "payment" as agreement that a contract has been completed in entirety.

You said: "The word payment implies that all obligational ties between the giver and receiver of the good are void / paid for."

But this would be true if the seller accepted, say, any IOU offered by the buyer (without his endorsement) other than the buyer's own IOU? Would that constitute a 'payment' in your eyes?

It would constitute a payment with regards to the seller, if he / she so accepted it. But it could not constitute a final settlement. The final settlement would only come about with the dissolution of the IOU, i.e. with a legal transfer of that which IO to U. And if that which IOU is money, then for the circuit to close it would take I to get my hands on money in a way that no longer incurs any further OUs, that is by selling the product of my labour (assuming no endowments). Of course I can issue IOUs to someone else in exchange for money, but that would just be exchanging one circuit for another.

And that's also where I think my Magritte analogy ends. Good for a laugh, but not much more. I would personally consider money, as well as all other financial assets / liabilities, legal documents that refer to some real world thing, whether existant or hypothetical. But they are not that thing itself. They are its legal alter ego.

Consider the case of using land in payment (for something). I own land and am strapped for cash. I do not live on it, in fact I've rented it out. You accept land as payment. Must I move the land? No. Must I evict the tenant? No. All I need to do is 'pay' you by changing the name on the deed in a way that will hold in front of a court of law. After that, IOU nothing and final payment has occured. But payment occured without using money, because land is not money, nor are land deeds. Money can be used in payments but must not. A final settlement with money requires that the money return to the issuer (and that the issuer may not issue on himself). I cannot return an IOU to the issuer and consider things settled (unless I gift it). In that sense I find it helpful to to think of money in hierarchies for which the same rule applies. Non bank public - banks - central bank. (Foreign currency is a special case. Payments between countries are like having a banking system without a central bank.)

Another problem I've found with 'payment' is that it isn't always clear

a) if it is something the buyer performs ("I paid you") and the seller receives ("You paid me") -- not wholly unlike a haircut --, or

b) something the seller receives for the goods he sold ("I got paid for the car I sold"), and the buyer performs in relation to the goods he bought ("I paid the car I bought").

How do you see this?

Without any further information, a) seems to describe a gift of money in the usual sense of the word 'gift' while b) describes a sale that involves a payment.

As you might see, I've given this a thought or two. I don't need you to confess that your definition doesn't work -- it clearly works for you; or should I say: it fits in the implicit model of the economy you use.

I can see that :-). I'm always looking to improve and expand my understanding. I like doing that by first articulating my point of view (not always easy) and then seing whether anyone can poke holes in it (of which I'm sure there are many). That's why I enjoy conversations like this!

What is important to me is that you understand why I've made the choice not to share the conventional definition of 'payment'.

I think you're making a correct distinction between goods and positive and negative deeds that keep the relative score among economic agents. When thinking in economic terms, I personally would work with the latter. You seem to prefer to work with 'apples and oranges'.

If you as a store owner suggested to me, a service provider, that you could give me a gift card instead of money for my services, and I accepted it, it would make some sense to say that you paid with a gift card. A closer look makes me think otherwise:

A gift card is really an IOU (I owe you goods) from you. You paid with your (store's) own IOU, which doesn't sound too logical? One either pays, or then one issues an IOU. I might accept the gift card instead of money because I have seen in your store a chainsaw I've been looking for, and the price seems to be "right". I want to buy it, so it doesn't matter whether I get money or a gift card from you. The gift card from you, as your IOU, is not a payment, but I assume that you are going to pay me for my services by giving me the chainsaw, so I accept the gift card.

Oliver: "I would personally consider money, as well as all other financial assets / liabilities, legal documents that refer to some real world thing, whether existant or hypothetical. But they are not that thing itself. They are its legal alter ego."

I think that, combined with your "deed example", is somewhat misleading. The deed establishes the ownership of land. But financial assets are not about ownership of real assets (especially not money; we could argue about shares, but let's not...). When I buy goods from you, that's when the ownership changes (not exactly, but let's not go into details). Money doesn't refer to any real world thing, although there's a vague idea of that thing, say the beer you're planning to buy with it, lurking somewhere in its holder's mind (is this what you meant with 'hypothetical'?).

Your 'final settlement' seems to be very close to my 'payment', if not an exact counterpart.

Just to make sure: If you look at my gift economy interpretation, do you agree that it would be weird for Betty to think that she got paid (by Andy, or anyone) when it was recorded that she gave away bananas without getting anything in return? This should be even more clear if we look at the same situation in a multilateral gift economy without explicit record-keeping. The expectation of a "counter-gift" is always present there, too, but it would make no sense at all to say that Betty got paid -- right? Betty's "right" to take goods, in turn, from someone is "baked in the cake" -- it's part of the system. Does this make any sense? I'm very tired, going to sleep now :-)

Antti,You're right, my theory needs some work and my comment above is misleading. The example is actually a form of barter. I was merely trying to point out that it isn't the good itself that needs to change hands. What matters is the legal act, in this case the change of ownership. The land obviously exists.

As opposed to money where the goods it refers to do not actually exist - yet. Money is a promise by the debtor to produce goods of equal monetary value to those already received some time in the future. What matters though, is not the goods themselves, but the promises (that are marked up and down). Legaly speaking, my debt is not extinguished when I work / produce things. What counts is that a: someone gives me money for what I do and b: I hand over that money, in whatever form, to my bank. There are three steps in this process. First, I have to actually produce something. Secondly, for anyone to care, I have to offer it in a way that it can be 'bought' at market. Thirdly, I have to trade that mark up in my checking account for a mark down on my loan. And it is because steps 2 & 3 are vital for a monetary economy to function that we value the promises themselves, too, not only that which we believe we can trade them in for. So, you have the classic backing theory part - the value of money is (or should be) equal to the value of the good it was first exchanged for. But then you also have a time and a trust / belief factor. We value money itself, because we trust it will be able do things for us in future - if only keeping us out of jail. Most theories, I find, focus on one or the other. Nick Rowe is a man of the latter. This also gives us two things that can fail. Either an economy does not live up to its collective promises on the production side of things or it fails on the belief / trust front. Promises either turn out to be lies, or we believe them to be lies.

So my suggestion would be to rename your theory 'promise economics', or 'prominomics', if you prefer :-).

Thanks for the OT reply. (OT was my question: How would you relate my gift-certificate example and your definition of "payment"?)

From your reply, I gather that you would not recognize the issuance of a gift-certificate in "payment" for labor-performed as "beginning a new contract period".

In other words, for you, the IOU earned by the worker continues unchanged into the duration of the gift-certificate. Then, when the gift-certificate is finally presented for "payment", final payment is received.

The omission (in this thought pattern) that I notice is the assignment-of-risk should the gift-certificate be lost or stolen. I would place the entire risk onto the worker holding the certificate. The worker is at risk of losing his entire payment for work performed. The store retains it's obligation no matter who presents the certificate (but we recognize that if the gift-certificate is NEVER presented, the store wins an unearned gain.)

I think that in your gift based model, payment at the end of contract periods will become blurred.

I also would guess that this type of transaction would NEVER be recorded in your accounting ledger.

Maybe there is some insight to be gained by focussing on the original wording from Genoan double entry book keeping for debits and credits. Deve dare (must give) and deve avere (must have) are what in English is known as debit and credit (and in German as soll und haben (should and have)). The original Italian wording is most precise in that it captures not an actual state of affairs, but a promise to bring such a state about. Whaddya think?

I used to view money as an "indirect IOU" of the debtor you talk about. That made it his promise. Seeing it that way gives you the right idea, but we can do much better :-)

2. "Thirdly, I have to trade that mark up in my checking account for a mark down on my loan."

This is not relevant. It's better to think in terms of an overdraft. That's closest to the underlying logic ("truth"). You don't need to earn any "money" or a "mark up" on your account -- you sell goods and your debt is written off.

I'm going to pull a JKH on you and tell you that it makes sense to break the transactions down their irreducible components. Netting is something that happens afterwards. Also, from a logical point of view, it always makes sense to start with a blank slate. So, existing assets are just assets that entered the economy in a previous period. From a purely macroeconomic (= value added & subtracted) point of view you must thus focus on the initial transaction by which the newly produced good entered the monetary economy / was first accounted for. All subsequent asset swaps (forgetting consumption / depreciation for the moment) are microeconomic in nature.

you sell goods and your debt is written off

Yes, but you rightly say, you 'sell' them. Selling = giving goods and receiving money. You couldn't write: you gift goods and your debt is written off. You need the receipt, otherwise the transaction is legally null and void.

Another analogy: my mother used to say that the reason one needs to show one's passport at the border is to prove one's existence to the customs officer. I always found that a very strange thing to say, but technically speaking it is actually correct. Within the logic of cross border human 'transactions', a person only exists and can only then be allowed to cross the legal line known as a national border if he / she can produce the corresponding paper to 'prove' it. In Nick's world it would suffice to send passports to the airport without the holder. That, I find absurd. But I would never go as far as saying that passports do not matter / do not really exist. And that seems to be what you're doing.

Such a net balance can be broken down into a series of more basic promises made / promises fulfilled. My net balance of -3 promises could well be the result of having fulfilled 10 promises while making 13 new ones. Also, one more reason to doubt the significance of the measure of a money stock.

It's better to think in terms of an overdraft. That's closest to the underlying logic ("truth"). You don't need to earn any "money" or a "mark up" on your account -- you sell goods and your debt is written off.

I have a feeling that what you mean by 'truth' is somehow an 'ought', not an 'is'. I have a mortgage and repayment happens on a fixed schedule. Nonetheless I earn money that I keep in a checking account. So I have positive and negative balances at the same time that are not netted until me and my bank say so. That's the 'is' situation which I believe one has to assign meaning to. But yes, towards society I 'owe' the net balance, not any gross measure. But I have the potential sitting in my checking account to change that net balance for the worse by spending it, which I can do without having to ask anyone. I couldn't do the same that if I repayed my mortgage in 'real time'. Same net balance, different economic meaning.

Sorry, Oliver, but you cannot be the contrarian in this discussion! I'm arguing that money doesn't exist, so that makes me a contrarian, while you represent the dull mainstream ;-)

You said: "But I have the potential sitting in my checking account to change that net balance for the worse by spending it, which I can do without having to ask anyone."

The same potential which you would have should you and the bank have agreed on an overdraft limit?

What we are really arguing about is this: Is money an "irreducible component" or an "unnecessary component" in this case?

What I'm saying is that we could have arrived at the "overdraft accounting technique" without ever using the separate loan account. Using a separate loan account helps us to think in terms of unnecessary components -- not in terms of irreducible components.

You said: "You couldn't write: you gift goods and your debt is written off. You need the receipt, otherwise the transaction is legally null and void."

Yes, but is the receipt 'money'? Or is the receipt an acknowledgement, a record made in the central record-keeping system, that you have delivered goods without receiving anything in return (which sounds much like a gift in the sense the word is used in a "gift economy")? What I'm saying is that it is not a thing you receive; it is a record which is made, and that record is specific to your account; it cannot be moved to another account. The record doesn't even exist (quantum economics?) in a "balance form" if the record was a credit entry made on account with a debit balance large enough to cover the entry sum.

I have to write the post on overdrafts, because again we are talking about things that I might be able to clarify (a bit) with that post. I'll start writing now!

I will build my overdraft post around this document of mine which I've been linking to many times earlier, for instance in Nick's blog.

Do you see the blue, green and yellow circles? Those map the matching items in the two accounting techniques.

Note that where I write "Unused overdraft" it should said "Unused ovedraft + initial checking account balance", so that it would also cover (common) scenarios where the initial balance is not zero but positive.

What I'm saying is that in practice the credit contracts behind an overdraft and what I call a traditional bank loan often differ from each other, but (in theory) these techniques are identical.

The interesting question is:

Why do we say debt 'repayment' happens at time t+1 (point 3 in my document: the sale of goods) in case of an overdraft but at time t+2 (point 4 in my document: reduction in credit limit) in case of a traditional bank loan?

Trust and belief are central to this. Money has value because we all believe that it has value, and trust that when we accept it in return for providing goods / services, we will be able to turn it back into goods / services sometime later.

Antti: “Sorry, Oliver, but you cannot be the contrarian in this discussion! I'm arguing that money doesn't exist, so that makes me a contrarian, while you represent the dull mainstream ;-)”

It is good to be a contrarian as it helps to think outside the box. However, most people are not contrarian so you need to think about that in explaining yourself to others.

When most people read “I’m arguing that money doesn’t exist” they will switch off and stop reading as they won’t understand what you mean. The best response you can hope for is a question “what do you mean when you say that money doesn’t exist”?

So you should also say what you mean by “money doesn’t exist” at the same time as using the phrase so that people are drawn into wanting to read more.

If you want to make an argument to persuade someone of something you need to do three things:

1. State a question that the OTHER PERSON wants to answer

2. Explain why the question is important and state the benefits to the OTHER PERSON of finding an answer

3. Answer the question in a persuasive way at the appropriate level for the OTHER PERSON.

For example, the question might be “What do we need to do to educate the general population about how the money system works”?

The reason the question is important might be that it would help the general population in some specific ways (you would have to state the specific ways)

The answer is then your insights expressed in a way that answers the question.

Currently, you don’t seem to have a clear question that you are trying to answer, or a reason why the answer to that question would be important to your audience, and you don’t have a well-defined audience e.g. economists, bankers, policy makers, non-economists, other or a combination?

Also, express your answer in a way that is self-contained and doesn't reference other material e.g. don't reference your conversations with JKH but include the insights you have obtained from those conversations. Make it easy for the audience to understand and agree with your arguments.

What is the FULL answer to the question (“money does not exist” may be only part of the answer and may not even be the most important part of the answer – I am speculating here because I don’t know what the question is).

Jamie: "Money has value because we all believe that it has value, and trust that when we accept it in return for providing goods / services, we will be able to turn it back into goods / services sometime later."

I agree with the basic message in what you say here.

I would like to simplify it by suggesting that we see value in the credit balance ("money") because we trust that we can turn it into goods later (without incurring any liability when accepting those goods). So I wouldn't differentiate between this trust and a "belief in the value of money" the way you seem to do in your sentence.

Jamie: I agree with your points about making an argument and persuading others. Thanks! It's definitely something I need to work a lot more on. (I've got similar feedback earlier.)

Partly for my defence, I have to say that the lack of a clear argument could be partly due to the fact that what I'm saying has such broad consequences. I don't know where to start.

What I see myself as saying is this:

Money (its "essence"; what is money?, etc) has been a big problem in economic theory, and still is. Money, and the financial system more broadly, seems to have a lot to do with recessions and depressions, but the mainstream economic theory cannot explain how and why. Outside the mainstream, there are theories (like Minsky's) that seem to explain how the financial system is linked to recessions. But a synthesis is clearly missing, and the "heterodox schools" are engaged in an endless argument with the mainstream.

I think I have that synthesis. And it all starts with recognizing that we have got wrong the three functions of money. Money is not a medium of exchange in the way we describe it. We can actually build a model of the economy where money doesn't "flow", without abstracting away from the financial system (or banking system as part of it).

Antti: “what I'm saying has such broad consequences. I don't know where to start”

Yes, the breadth of these issues makes it difficult to know where to start. That is why it is useful to start by asking what question you want to answer. It may be, when you do that, you see that there is one overall question, and a number of subsidiary questions which you need to answer before you can answer the overall question.

In that way, you can shape a plan of action and structure your overall argument.

It may also be that you need to make different arguments to different people. For example, economists will listen to you only if you demonstrate to them that you understand their technical language. However, non-economists will switch off if you use this technical language.

“And it all starts with recognizing that we have got wrong the three functions of money. Money is not a medium of exchange in the way we describe it. We can actually build a model of the economy where money doesn't "flow", without abstracting away from the financial system (or banking system as part of it)”

Note that these sentences are mostly about what is WRONG, what money IS NOT, and how money DOESN’T work. You need to make an argument about what is RIGHT, what money IS, and how money DOES work.

Focusing on a specific question also limits the scope of what is relevant to a model. For example, TMF on Nick’s blog is more interested in the finance sector than I am. In particular, he is interested in bank capital. However, bank capital is not relevant to the question(s) I am addressing in my current model, so, even though TMF’s comments are valid, I often answer them by extending my list of assumptions e.g. to take capital out of scope. It is easy to be pulled off track unless you have a clear focus, and that’s true even if the other person is making a good point e.g. a more thorough examination of banking would, indeed, need to include capital.

As I said to TMF on Nick’s blog, if you try to answer every question at the same time, you won’t succeed in answering any question.

On a separate point, I find it useful to think about the quality criteria for my work. For example, if I was producing a model for discussion with you, one quality criterion would be that you understood the model (even if you didn’t agree with it). A separate quality criterion would be that you agreed with my model. I like to be clear, in my own mind, what specific criteria I am hoping to meet.

You can set whatever quality criteria you want for your work. However, it is important to be honest with yourself whether you are meeting those criteria, and change direction if you are not.